Two weeks ago saw the Bank of England’s anticipated interest rate hike – a shift from 0.25 per cent to 0.5 per cent – take place in a bid to calm inflation, consequently rattling the mortgage market with some rates increasing as a result.
For Alan Chan, director of IFS Wealth & Pensions, the concern at this stage is not too great from a business perspective.
He says that many lenders have already been quick off the mark and have raised mortgage rates to reflect this.
“Clearly, the cost of borrowing is higher now, but it is all relative because historically speaking interest rates are still very, very low.
“I don’t think it will have a big impact at this stage as interest rates are still very low, so the demand for mortgages to purchase properties will still be high; but we may see more clients keen to fix their rates for longer because of the recent rate rises by the BoE, so there could be less renewal business for mortgage brokers.”
Scott Gallacher, chartered financial planner at Rowley Turton, acknowledges that mortgage rates are “almost certainly going to rise”.
He adds: “However, it’s worth bearing in mind that interest rates are still very low and the rise in percentage terms is relatively modest. I can’t see that it will have a big impact because rates are still low.”
Meanwhile Brian Murphy, head of lending at the Mortgage Advice Bureau, notes that 80 per cent of mortgage borrowers in the UK are currently on fixed mortgages and will not be affected, but the impacts on variable mortgage borrowers are significant.
“For those whose mortgage tracks the BoE base rate, the recent increases will be passed on to borrowers in full and for those borrowers whose mortgage is the lender's variable revert rate or standard variable rate, it is the lender's decision generally whether to pass on in full any bank rate increase or decrease as they occur, although typically the increase or decrease is passed on in full.”
The wider impact on the cost of living is yet to be known in full, but is of concern to many at this stage.
Cost of living
Chan notes that: “Mortgage repayments will be higher, which means less disposable income to spend on other areas of life and less to save each month.”
For Gallacher, the interest rate increase on its own is not a major factor but with rising energy prices and national insurance “the picture is not so rosy”.
He adds: “These will combine to make life difficult for many people and some will have to make cutbacks if they can.”
Hinesh Patel, portfolio manager at Quilter Investors, says the hike from the BoE was “very much expected and needed”, although observes that action has been taken too late.
“The bad news for consumers is inflation is now likely to hit 7 per cent and will remain elevated for at least the rest of this year."
He notes that energy prices “remain the elephant in the room” and the central bank “will be hoping they don’t keep escalating”.
Patel adds: “The squeeze for the real economy ahead is real and we can already see the heart-breaking stories in the news.”
On the other side of the coin, questions about whether those with cash in the bank may finally be able to get a return abound, but the general feeling is that the value of savings will still be eroded by inflation.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, says mortgage borrowers “risk getting burned by the intense heat of rate rises in the mortgage market”, while savers “may struggle to notice the lukewarm efforts of savings providers”.
Fixed rates
Murphy says that with inflation at its highest level in years and forecast to continue, now may be a good time to fix mortgages.
“For most households their mortgage represents their largest household expenditure. Therefore, switching to a fixed rate for many will give them peace of mind and assurance in terms of being able to budget accurately for a large part of their monthly outgoings at a time when consumers have very few choices in terms of having any certainty over many elements of day-to-day living costs.”
Chan says he did not think many people would be celebrating a 0.5 per cent interest rate.
“It has hovered around this level since 2009 and well below the level of inflation over the same period.”
In fact, the severity of the situation in terms of mortgage rates may lead to a surge in equity release for those who own property. Matt Stirland, head of equity release at Age Partnership, says that in the standard mortgage market we are likely to see lenders passing the rate increase onto their customers.
He explains: “The big difference between standard mortgages and equity release is equity release rates are fixed for life, so those people with existing plans are safe in the knowledge that their rate won’t be jumping.
“It has been well documented in the media that rising interest rates in the conventional mortgage market will push up the cost of living for those customers on variable and base-rate tracking products. This will be an additional household expense along with increases in energy bills, council tax, national insurance and other household bills.
“All of this may well result in additional demand for equity release as, even with equity release rate increases, the fact that monthly repayments are optional means that it will remain a viable solution for those aged 55 and over who are looking for additional retirement income, gifting to family or funding for home improvement.”
Stephen Lowe, group communications director at Just Group, says that rising interest rates could see an upward rise in activity in the mortgage market for various reasons, such as house prices remaining strong.
He says: “It may encourage more new business or re-broking from people who believe equity release rates have reached rock bottom so now is a good time to take out a lifetime mortgage at a fixed rate or switch to a more competitive rate.”
For Ian Lowes, managing director at Lowes Financial Management, it is evident that savers are not going to get back money on their savings with this adjustment.
“Unless interest rates rise dramatically or inflation falls, this situation will continue to the extent that perception of taking no risk at all by leaving money in the bank could be one of the biggest risks an individual can take.”
Hargreaves' Coles says it is difficult to know how effective rates will be in controlling inflation, especially given so much of the inflation rate is being driven by global oil and gas prices.
She says: “With inflation set to hit 7.25 per cent in April, the BoE could not just sit on its hands and hope for the best.”
Coles describes the central bank’s effect of making it more expensive to borrow and spend, which comes as a horrible blow for borrowers who now have to add bigger interest charges to an “already toxic mixture”.
Ruth Gillbe is a freelance journalist
